Question: Paul Byrne is a first year student in a business program

Paul Byrne is a first-year student in a business program in Toronto. Toward the end of the academic year, he was approached by a friend who offered to sell him his hot dog vending cart. The friend was finishing his university studies and was going to be starting a permanent job in the summer, so he no longer needed the cart. Paul thought about the offer for a few days and decided to buy the cart. He thought that it would be a way to make money to finance his education and learn how to manage a business at the same time.
Paul operated his business from late April, when the weather started to warm up, to early September, when it was time to get back to school. Paul was so busy running the business, he had no time to keep any accounting records. So on September 10, after he had put away the cart until the next year, he sat down with all the data he had carefully collected throughout the summer about his business and placed in a shoebox. From the information in the shoebox, he obtained the following:
a. On April 1, Paul opened a bank account in the name of his company Paul's Dogs. He deposited $2,000 from his bank account into the account. Paul decided he would operate the business as a proprietorship. (Remember, in a proprietorship the owners' equity section of the balance sheet includes only a single account called owner's equity or owner's capital. This is different from a corporation, where there will be a common shares account and a retained earnings account.)
b. Paul purchased the cart from his friend on April 8 for $1,500. He gave his friend
$1,000 in cash and promised to pay him the rest at the end of the summer. The cart was already four years old and Paul's friend said it should be good for another three or four years, after which time it would probably be junk.
c. Paul took the cart to a repair shop. He had the cart painted, serviced, and repaired.
Paul paid the shop $300 in cash.
d. Paul went to city hall and obtained a licence to operate his cart in the city. The li cense cost $250 and Paul paid with his debit card. The licence is valid for two years and expires at the end of the next calendar year.
e. During the summer, Paul sold hot dogs and drinks for $15,750 cash.
f. In late August, Paul was asked to bring his cart to a softball tournament where he would be the official supplier of hot dogs to participants. The agreement was that Paul would keep track of the hot dogs and drinks he handed out to the players and send a bill to the tournament organizers. At the end of the tournament, Paul sent a bill to the organizers for $1,115. The organizers said they would pay on September 20.
g. During the summer, Paul bought hot dogs, buns, drinks, condiments, napkins, plas tic cutlery, paper plates, and other supplies for $8,525. All of these items were paid for in cash.
h. At the end of the summer, Paul had about $750 in non-perishable items stored in his basement at home (he had used $7,775 of the supplies he had bought).
i. On several days during the summer, Paul was unable to operate the cart himself. On those days, he hired his brother to do it. During the entire summer, Paul paid his brother $375 cash. As of today, Paul still owes him $75.
j. During the summer, Paul incurred $1,000 in other expenses. All of these were paid in cash.
k. On August 15, Paul withdrew $1,500 from the business to pay for tuition and other school-related items.
l. On September 5, Paul paid his friend the $500 he owed him.

a. Enter each of the transactions into an accounting equation spreadsheet. You can use a computer spreadsheet program or create a spreadsheet manually, although the computer spreadsheet will probably be easier because you will be able to correct mistakes more easily. Create a separate column on the spreadsheet for each account. Be sure to include adjusting entries for depreciation of the cart and expensing of the licence.
b. Provide explanations for each of your entries. You should explain why you have treated the economic events as you have (that is, why you have recorded an asset, liability, etc.).
c. Prepare a balance sheet as of September 10 and an income statement for the period ended September 10 from your spreadsheet. Make sure to make a closing entry.
d. Explain why the financial statements you have prepared would be useful to Paul.
e. If Paul asked you for some feedback on his business from examining the financial statements, what would you be able to tell him?

Sale on SolutionInn
  • CreatedFebruary 26, 2015
  • Files Included
Post your question